going concern issues in financial reporting - auditing

Going Concern issues infinancial reporting:

a guide for companiesand directors

Published in 2009 by:Australian Institute of Company Directors (AICD)Level 2255 George StreetSydney NSW 2000Telephone: (+61 2) 8248 6600Facsimile: (+61 2) 8248 6633www.companydirectors.com.aupublications@companydirectors.com.au

Auditing and Assurance Standards Board (AUASB)Level 7600 Bourke StreetMelbourne VIC 3000Telephone: (+61 3) 8080 7400Facsimile: (+61 3) 8080 [email protected]

© Australian Institute of Company Directors (AICD)© Auditing and Assurance Standards Board (AUASB)© Financial Reporting Council (UK) 2009. Portions of this publication have been

adapted and reproduced from an Auditing Practices Board Bulletin: GoingConcern Issues During the Current Economic Conditions (December 2008) withthe kind permission of the Financial Reporting Council (UK). All rightsreserved. For further information please visit www.frc.org.uk ortelephone +44 (0)20 7492 2300.

© Portions of this publication have been adapted and reproduced from a KPMGFlash Report: How Concerned Should Directors be with Going Concern? (February2009) with the kind permission of KPMG. All rights reserved.

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National Library of Australia Cataloguing-in-Publication entryGoing Concern issues in financial reporting: a guide for companies anddirectors/AICD, AUASB

ISBN 9781876604158 (pbk.). 9781876604172 (Electronic)1. Going concern (Accounting). 2. Auditing–Australia.3. Corporations–Australia–accounting

657.450994

AICDThe Australian Institute of Company Directors (AICD) is a member institute fordirectors dedicated to having a positive influence on the economy and society bypromoting professional directorship and good governance. AICD delivers education,information and advocacy to enrich the capabilities of directors, influence the corporategovernance environment in Australia and promote understanding of and respect for therole of directors. With offices in each state and more than 24 000 members, AICDrepresents a diverse range of organisations, from the top 200 publicly-listed companies tonot-for-profits, public sector entities and smaller private family concerns.

AUASBThe Auditing and Assurance Standards Board (AUASB) is an independent, statutoryagency of the Australian Government, responsible for developing, issuing andmaintaining auditing and assurance standards. The mission of the AUASB is to develop,in the public interest, high-quality auditing and assurance standards and related guidance,as a means to enhance the relevance, reliability and timeliness of information provided tousers of auditing and assurance services. Australian Auditing Standards issued by theAUASB are legally enforceable for audits or reviews of financial reports required by, or inaccordance with the Corporations Act 2001.

DisclaimerThe material in this publication does not constitute legal, accounting or otherprofessional advice. While all reasonable care has been taken in its preparation, neitherthe AICD nor the AUASB makes any express or implied representations or warranties asto the completeness, reliability or accuracy of any material in this publication. Thispublication should not be used or relied upon as a substitute for professional advice or asa basis for formulating business decisions. To the extent permitted by law, AICD andAUASB exclude all liability for any loss or damage arising out of the use of the materialin the publication. Any links to third-party websites are provided for convenience onlyand do not represent endorsement, sponsorship or approval of those third parties or anyproducts and services offered.

CopyrightCopyright strictly reserved. No part of the material covered by copyright should be copiedor reproduced in any form or by any means without the written permission of AICD andAUASB. AICD and AUASB endeavour to contact copyright holders and requestpermission to reproduce all copyright material. Where AICD and AUASB have beenunable to trace or contact copyright holders, if notified, AICD and AUASB will ensurefull acknowledgment of the use of copyright material.

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Contents

Executive summary 9Going concern—what it means and its contextin difficult or uncertain economic conditions 13

Introduction 13The directors’ going concern assessment and liquidityrisk disclosures 17

Overview of requirements for going concern assessment by directors 17

Auditor’s responsibility to review directors’ assessment 20

The going concern review period 20

Key company processes and procedures to facilitate

the going concern assessment 22

Examples of possible events or conditions which may affect

the going concern assumption 24

Financial reporting areas that may be affected by difficult

or uncertain economic conditions 25

The significance of identified events or conditions will vary

from company to company 26

The relationship between going concern and liquidity risk

disclosures in the financial report 27

Additional risk disclosures for listed companies 30

Insolvency and going concern 33When is a company “insolvent”? 33

What are the consequences of insolvent trading? 33

When, and over what period, is insolvency determined? 34

Directors’ resolution of solvency 36

How does determining solvency differ from assessing

going concern? 38

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The company’s interaction with the auditor 39Auditor’s evaluation of directors’ going concern assessment 39Auditor’s consideration of directors’ strategies that mitigate eventsor conditions giving rise to a material uncertainty 41Evaluating the adequacy of disclosures about going concern 41

Disclosures in the financial report 41

Disclosures in the Directors’ Report 42

Implications for the auditor’s report 43Types of audit opinions 43

Reporting to ASIC 45

Communication issues 47ASX Listing Rules applicable to listed companies re going concern 47

Listing Rule 3.1–Continuous disclosure 47

Listing Rule 12.2 Ongoing Requirements–Financial Condition 50

Listing Rules 17.1, 17.2 and 17.3 Trading halts, suspension

of securities from quotation 51

Corporations Act 2001 51Focus on the particular circumstances of the company 51

Appendices 55Appendix 1—checklist of possible events and conditions that

may affect the assessment of going concern 55Obtaining external finance 55

Management plans to overcome financing difficulties include disposal

of assets or possible rights issues 56

Company provides significant loans or guarantees to related

parties or third parties 56

Company dependent upon guarantees or financial support

provided by a third party 56

Future cash flows 56

Company heavily dependent upon particular counterparties 57

6 GOING CONCERN ISSUES IN FINANCIAL REPORTING

Appendix 2—checklist of risk factors arising from uncertainor difficult economic conditions 58

Fair values 58

Impairments 59

Current versus non-current classification 59

Revenue recognition 59

Defined benefit superannuation plans 59

Hedging 60

Insurance 60

Deferred income taxes 60

Appendix 3—Examples of directors’ going concern andsolvency disclosures in the Directors’ Report 61

Appendix 4—Types of auditor’s opinions 65Appendix 5—Linking the auditor’s going concern

considerations with types of audit opinions 67Appendix 6—Summary of Australian laws/regulations on

going concern 68Directors’ obligations 68

Auditor’s obligations 71

going concern issues in financial reporting 7

Executive summary

This publication has been developed in an environment whenAustralian companies and other entities are experiencing theimpact of difficult or uncertain economic conditions in varyingdegrees. The effects of such economic conditions may besignificant in the area of financial reporting, in particular, thedirectors’ assessment of their company’s ability to continue as agoing concern. This publication explains the concept of “goingconcern” and aims to assist company directors in performing, andreporting on, their going concern assessment.

Going concern is a basic business concept which is also afundamental principle underlying the preparation of the vastmajority of annual reports, and in particular, the financialreports

1, of Australian companies. Australian Accounting

Standards require directors to consider whether there arematerial uncertainties that would lead to significant doubt abouta company’s ability to continue to pay its debts over at least thenext 12 months and to make adequate disclosures in thefinancial report if such uncertainties are identified. Thecompany’s auditors are required by Australian AuditingStandards to evaluate the directors’ assessment of the company’sability to continue as a going concern within the “relevantperiod”.

2

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1. A financial report comprises the complete set of financial statementsincluding comparative information (statement of financial position,statement of comprehensive income, statement of changes in equity,statement of cash flows, notes to the financial statements) and thedirectors’ declaration. A financial report is part of an annual report. Referto Accounting Standard AASB 101 (Revised September 2007), paragraph10, for the definition of complete set of financial statements.

2. See Compiled Auditing Standard ASA 570 Going Concern, paragraphs 7,22 and 23.

Difficult or uncertain economic conditions, as they relate togoing concern, present challenges for:

• Company directors (directors)—particularly those oflisted companies, who will need to ensure that theyprepare thoroughly for their assessment of goingconcern and make appropriate financial reportdisclosures

• Independent Auditors (auditors)—who will need toensure that they adequately evaluate directors’ goingconcern assessments and only refer to going concern intheir audit opinions when appropriate

• Users of financial reports—who will need to carefullyconsider the potential implications of these conditionsin market announcements and financial reports. Suchusers include the investment community, financelenders, suppliers, customers and employees.

In view of the above, this publication includes a discussion of:

• The going concern assumption—what it means and itscontext in difficult or uncertain economic conditions

• Going concern and liquidity risk—in particular,disclosure requirements

• The company’s interaction with the auditor—thedirectors’ role in planning for the audit and the types ofaudit opinions that may result from uncertainties aboutthe going concern assumption for a company

• Communications issues—including continuous disclosureobligations of listed companies.

There is some history of shareholders and the business mediaconfusing the concepts of “insolvency” and “going concern”.Similarly, the distinctions between an “unqualified opinioncontaining an emphasis of matter” paragraph, a “qualified” auditopinion and a “disclaimer” of audit opinion are not always well


understood by some readers of financial reports. This publicationaddresses the confusion over the concepts of “insolvency” and“going concern” by including an overview of relevant insolvencylaw to explain what constitutes “insolvency”, in addition to anexplanation of the “going concern” concept. It also explains thenature and range of possible auditor’s opinions relating to goingconcern issues, to enable directors to be better informed of theaudit implications of going concern issues.

This publication also contains helpful appendices that include:

• a checklist of possible events and conditions that mayaffect the going concern assessment

• a checklist of risk factors to consider in the preparation offinancial reports during challenging or uncertaineconomic conditions

• examples of going concern and solvency disclosures inthe Directors’ Report

• summary of the circumstances in which each type ofaudit opinion may be reached by the auditor, dependingon the directors’ going concern assessment anddisclosures

• a flowchart showing how the auditor’s going concernconsiderations are linked to the various types of auditopinions

• a summary of Australian laws and regulations relating togoing concern.

This publication provides guidance specifically aimed at for-profitcompanies (particularly those that are listed on the AustralianSecurities Exchange (ASX)) and their directors. It may also beuseful for directors of unlisted and other companies, otherdisclosing entities, and non-corporate entities (for example, not-for-profits) with similar reporting and/or regulatoryresponsibilities related to going concern. This publication mayalso provide useful information for readers and users of annualreports, for example, investors and the business media.

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The term “directors” is used throughout this publication torefer to those persons who are charged with the governanceresponsibilities of a company (collectively “the board ofdirectors” or their equivalent). It is acknowledged that in somecompanies, some of the directors’ responsibilities may beperformed by management or the audit committee, andconsequently, the term is taken to include management and/orthe audit committee where appropriate.

Certain requirements and guidance found in the CorporationsAct 2001, ASX Listing Rules, Australian Auditing Standards, andAustralian Accounting Standards are highlighted, but they are notmeant to be exhaustive. This publication does not establish orextend any new requirements in the area of going concern.

The Auditing and Assurance Standards Board (AUASB)Bulletin Auditing Considerations in an Uncertain EconomicEnvironment (April 2009) may be helpful to directors to betterunderstand auditors’ considerations and reporting responsibilitiesin relation to the financial report audit especially whenconducting the audit in times of uncertain or difficult economicconditions. The Bulletin highlights various auditingconsiderations relating to going concern and other financialreporting matters that are relevant in such economic conditions.


Going concern—what it means and its contextin difficult or uncertain economic conditions

Key points:➣ The going concern assumption is a fundamental principle

that underlies the preparation of the vast majority offinancial reports (incorporated in the annual reports) ofAustralian companies.

➣ A company is a going concern when it is considered to beable to pay its debts as and when they are due, andcontinue in operation without any intention or necessityto liquidate or otherwise wind up its operations for at leastthe next 12 months.

IntroductionThe vast majority of financial reports (included in the annualreports) of Australian companies are prepared on the assumptionthat a company is a going concern. If a company is not a goingconcern, and its financial report is prepared based on analternative authoritative basis (for example, liquidation basis),then the auditor is required to determine whether such a basis ofpreparation is appropriate.

3

This publication has been developed on the basis that thecompany’s financial report has been prepared on a going concernbasis. Under Australian Accounting Standards

4and the

Corporations Act 2001, directors are required to satisfy themselvesthat it is reasonable for them to conclude that it is appropriate toprepare the financial report on a going concern basis. Theserequirements are not intended to, and do not, guarantee that acompany will remain a going concern until the next financialreport (and annual report) is issued.

13

3. See Compiled Auditing Standard ASA 570, paragraph 454. See Australian Accounting Standard AASB 101 Presentation of Financial

Statements, (Revised September 2007) paragraph 25

A company (whether for-profit or not-for-profit) is a goingconcern when it is considered to be able to pay its debts as andwhen they are due, and continue in operation without anyintention or necessity to liquidate or otherwise wind up itsoperations for at least the next 12 months from the end of thereporting period (that is, financial year end).

Directors (or their equivalent in the case of not-for-profitentities) are required to assess a company’s ability to continue asa going concern each time the financial report is approved forissuance. In the case of companies subject to the Corporations Act2001, this assessment is performed annually, with half-yearlyassessments being additional for listed companies.

In contrast auditors are required by Australian AuditingStandards to evaluate the directors’ assessment of a company’sability to continue as a going concern for a period ofapproximately 12 months from the date of the auditor’s mostrecent report to the expected date of the auditor’s report for thenext reporting period.

5If the directors’ assessment period is

shorter than that of the auditor, the auditor is required byAustralian Auditing Standards to ask the directors to extendtheir assessment period to correspond to the auditor’s assessmentperiod.

6

Uncertain or difficult economic conditions provide particularchallenges for those involved in the preparation of annualreports, in particular, year-end financial reports. Oneconsequence is expected to be an increase in the disclosures inthe financial report (incorporated in the annual report) aboutthe company’s going concern assessment and liquidity risk (seeThe directors’ going concern assessment and liquidity risk disclosures


5. As indicated in Compiled Auditing Standard ASA 570, paragraph 7, thenext reporting period means “the next annual reporting period in the caseof an annual financial report; or, the corresponding reporting period for thefollowing year in the case of an interim reporting period.”

6. See Compiled Auditing Standard ASA 570, paragraph 23

discussion on page 17). For example, challenging economicconditions may lead to greater than usual uncertainty about:

• bank lending intentions and the availability of financemore generally

• the impact of such economic conditions on a company’scash flow position

• the impact of such economic conditions on a company’sown business

• the impact of such economic conditions on third partieswith whom the company conducts business, includingcustomers and suppliers.

It is important for directors and auditors to discuss at the earliestpossible opportunity in the audit process any issues that could ordo impact the company’s going concern assessment. TheAUASB Bulletin Auditing Considerations in an UncertainEconomic Environment (April 2009) includes relevant discussionon this matter. Following is an overview of directors’ obligationsconcerning their going concern assessment, in the context ofdifficult or uncertain economic conditions. Related disclosuresconcerning liquidity risk and insolvency are also explained.

GOING CONCERN ISSUES IN FINANCIAL REPORTING 15

The directors’ going concern assessment andliquidity risk disclosures

Key points:

➣ Directors will need to plan their assessment of goingconcern as early as practicable and have early discussionswith their finance providers and auditor about their plans.

➣ Difficult or uncertain economic conditions may give rise toa number of possible events and conditions that may affectthe going concern assessment.

➣ The significance of identified events and conditions willvary from company to company, but may be mitigated byother factors.

➣ The going concern assessment and the preparation ofliquidity risk disclosures in the financial report areinterrelated.

Overview of requirements for going concern assessment bydirectors

Accounting Standard AASB 101 Presentation of FinancialStatements requires directors when preparing the financial report to:

• make an assessment of a company’s ability to continue asa going concern

• disclose the uncertainties about which the directors wereaware in making their assessment of going concern wherethose uncertainties may cast significant doubt on thecompany’s ability to continue as a going concern.

A detailed analysis supporting a company’s going concern statusmay not be required if the company has a history of profitableoperations; there is little concern about it continuing to beprofitable; and it has ready access to required financial resources.

17

However, in a difficult or uncertain economic environment itmay become harder to support the going concern assumptionwithout performing such a detailed analysis. Directors shouldalways consider the appropriateness of the company’s goingconcern assessment at financial reporting end.

Directors should always satisfy themselves that managementhave adequate supporting documentation that is able to supportthe going concern assessment and assumption. Wheremanagement prepares a detailed analysis it should include theirreassessment of the extent to which their past forecasts (forexample, cash flows) and underlying assumptions have beenaccurate when compared to actual financial results. Factors toconsider in this evaluation include:

• the degree of uncertainty about a future event or conditionwill increase as the length of the period increases, untilthat event or condition is expected to occur

• an assumption that was made in the last going concernassessment may not remain valid for the currentassessment

• larger and more complex companies as well as thosepaticularly sensitive to external factors will requiresignificantly more judgments about the outcomes offuture events and conditions.

The effects of difficult or uncertain market conditions on anindividual company require careful evaluation. A difficult oruncertain economic environment in which the companyoperates does not of itself necessarily mean that there areuncertainties that may cast significant doubt about a company’sability to continue as a going concern.

In forming their final assessment of going concern directorswill need to evaluate which of the following potential outcomesis appropriate to their specific company circumstances:


• there are no material uncertainties that lead to significantdoubt about the company’s ability to continue as a goingconcern

• there are material uncertainties that lead to significantdoubt about the company’s ability to continue as a goingconcern or

• the use of the going concern basis is not appropriate.

The going concern assessment is likely to include a high degreeof judgment by directors and then subsequently by the auditordepending upon the individual circumstances of the company.

If during the going concern assessment process there emergedoubts about the ability of a company to remain a going concern,this does not necessarily mean that the company is or is likely tobecome insolvent. The solvency of a company is determined bycomparing its assets and liabilities along with its ability to meetliabilities as they fall due (See related Insolvency and goingconcern discussion on page 33).

When the directors are unable to state that the going concernbasis is appropriate they should consider seeking professionaladvice including legal advice especially with regard to directors’obligations under the law.

Australian Accounting Standards also require the financialstatements to include certain disclosures relevant to the overallgoing concern assessment, including liquidity risk, where thestatements are prepared in accordance with the Corporations Act2001. These disclosures when taken as part of the complete set offinancial statements facilitate the directors’ declaration regardingthe financial statements representing a “true and fair view”

7of

the company’s position at reporting date.


7. The “true and fair view” requirement is found in the Corporations Act 2001section 297. Accounting Standard AASB 101 (Revised September 2007),paragraph 15, refers to the requirement of fair presentation of financialstatements while AUS paragraph 15.1 requires a company preparing afinancial report in accordance with the Corporations Act 2001 to disclose inthe notes further information to give a true and fair view.

Listed companies have additional reporting obligations underthe Corporations Act 2001 and the ASX Listing Rules. The ASXListing Rules require that the Australian Stock Exchange (ASX)be notified immediately when a company becomes aware of anyinformation that a reasonable person would expect to have amaterial effect on the price or value of the company’s securities(See Communications issues on page 47).

Auditor’s responsibility to review directors’ assessment

The auditor is required by Australian Auditing Standards toreview the directors’ going concern assumption and to determineif in the auditor’s judgment there are events or conditions, whichcast significant doubt on the company’s ability to continue as agoing concern.

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When such events or conditions are identified the auditorthen uses professional judgment to ascertain if a “materialuncertainty” that leads to a significant doubt about thecompany’s going concern status exists (See The company’sinteraction with the auditor on page 39).

• A “material uncertainty” exists when the magnitude of itspotential impact is such that in the auditor’s professionaljudgment clear disclosure of the nature and implicationsof the uncertainty is necessary for the presentation of thefinancial report not to be misleading.

The going concern review period

The definition of the review period for the assessment of goingconcern depends upon who is performing the assessment:

For directors

• Australian Accounting Standards require the directors’assessment to be for at least, but not limited to, 12



months from the end of the reporting period (although itcould be a longer period).

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• The directors’ statutory going concern assessmentresponsibilities are determined by the interaction of theCorporations Act 2001 and the Australian AccountingStandards and focus mainly on the annual and half-yearfinancial reports. Key processes and procedures that willassist the directors in this process are discussed in the Keycompany processes and procedures to facilitate the goingconcern assessment on page 22.

For auditors

• Australian Auditing Standards require the auditor toevaluate the directors’ going concern assessment usingthe “relevant period.” This period is approximately 12months from the date that the auditor signs the mostrecent audit report (typically 2–3 months after thefinancial year end for companies subject to theCorporations Act 2001) to the expected date of theauditor’s report for the next reporting period (seefootnote 5 on page 14).

• Further, Australian Auditing Standards require auditorsto ask the directors to extend their own assessmentperiod to correspond to the auditor’s assessment period ifthe former is shorter than the latter.

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Therefore it is important to note that ordinarily the directors’going concern assessment period is the same as that of theauditor. However, there may be instances when the directors areunwilling or unable to extend their assessment period asrequested by the auditor. In these cases the auditor needs toconsider the effect of such response from the directors in theauditor’s report on the financial report.


9. See AASB 101, paragraphs 25 and 2610. See Compiled Auditing Standard ASA 570, paragraph 23

Key company processes and procedures to facilitate the goingconcern assessment

Directors should plan how they will conduct their going concernassessment process as early as practicable. They will need toapply an appropriate degree of rigour and formality throughoutthe assessment process. Points to consider include:

• the involvement of the audit committee (or equivalentbody) in the assessment process

• the processes and procedures that will be undertaken tosupport the going concern assessment

• the information that will need to be produced andcollected (such as board papers, budgets, cash flows andforecasts) to support their assessment

• comparison of the actual cash-flow position versus thebudget/forecast to assess the reliability of thebudgeting/forecasting process

• potential wording of going concern related disclosures inthe financial report

• whether any remedial action plan may be required• when it is appropriate to discuss with the auditor their

assessment (preferably before financial year-end date).

Early discussions between directors and the auditor will providethe auditor sufficient time to incorporate a timely evaluation ofthe directors’ assessment into their audit planning procedures. Itmay be useful for a draft of the proposed financial reportdisclosures about going concern and liquidity risk to be discussedin these meetings.

As a result of such early discussions directors may at leasthave an opportunity to obtain, adapt, or develop and implementtheir assessment plan to address any of the auditor’s feedback—for example, they may be able to obtain further supportingdocumentation or develop and implement a remedial actionplan. Therefore, appropriately addressing these issues well before


the preparation of the financial report (to be incorporated in theannual report) can help avoid any last minute going concernrelated issues for the company. Consequently this may in turnminimise the risk of the auditor issuing a qualified audit opiniondue to scope limitation or inadequate financial report disclosuresof going concern issues.

Notwithstanding these early discussions directors still need toconsider updating their going concern assessment if there are anyevents subsequent to the end of the reporting period up to thedate the directors approve the financial report which couldimpact the assessment. Further, the auditor is required byAustralian Auditing Standards to make their final evaluation asat the date when the directors approve the financial report andthen the auditor signs the audit report.

In order to identify these subsequent events and assess theirpotential impact directors should ensure the company hasappropriate internal processes and procedures in place. Thesemay include:

• updated cash flow forecasts and budgets prepared• latest available management accounts reviewed• documented and finalised borrowing arrangements• management of loan balances including monitoring of

repayments and cash flows• consideration of any contingent liabilities or commitments• identification and consideration of any change in market

conditions for the company’s products or services• documented and active financial risk management

processes• identification of key customer or supplier agreements

signed after financial year-end date• financial adaptability• other relevant factors.


Examples of possible events or conditions which may affectthe going concern assumptionThere are certain events or conditions that by themselves orcollectively may call into question the appropriateness of the goingconcern assumption in the preparation of a financial report. Onceidentified such events or conditions will necessitate an analysis oftheir impact on the company’s going concern status. Difficult oruncertain economic conditions are likely to increase key businessrisks in many companies that may in turn affect the financial reportdisclosures including going concern. For example, difficulteconomic conditions may cause trading third parties (includingsuppliers and customers) to limit finance available. Other financeproviders may also be more risk averse when considering whetherto provide, renew, or vary finance facilities.

Directors will need to consider carefully the company’sposition in light of the information available to them and theassumptions as to the future availability of finance. Further,directors also need to ensure that management has appropriateprocesses and systems in place to provide adequate supportingdocumentation for directors and auditors in assessing goingconcern.

Compiled Auditing Standard ASA 570 Going Concerncontains a non-exhaustive list of possible events or conditionsthat may create financial, operating and other business risks thatindividually or collectively may cast significant doubt on theappropriateness of the going concern assumption.

11Directors may

find this list helpful when conducting their going concernassessment. The list includes the following events or conditions:

• a net liability or net current liability position• negative operating cash flows• fixed-term borrowings approaching maturity without

realistic prospects of renewal or repayment, or excessive



reliance on short-term borrowings to finance long-termassets

• indicators of withdrawal of financial support by lenders• withdrawal or variation of credit terms by creditors• major debt repayment falling due where refinancing is

necessary to the company’s continued existence• inability to comply with the terms of loan agreements or

to pay creditors on due dates• loss of a major market, franchise, licence or principal

supplier and/or key customer• indicators of the company’s inability to handle increased

competition in a shrinking market• loss of key management without replacement• failure of other companies with similar structures and

comparable operations in the same industry.

Appendix 1 contains a checklist of additional possible events andconditions that may affect the going concernassessment/assumption. Refer AUASB Bulletin AuditingConsiderations in an Uncertain Economic Environment (April2009) for further information.

Financial reporting areas that may be affected by difficult oruncertain economic conditions

A difficult or uncertain economic climate may directly affect theunderlying accounting and disclosure of certain financialreporting areas. Consequently, this may impact the auditor’sjudgment of whether the going concern assumption isappropriate. Examples of such areas include:

• asset impairments• fair value calculations and accounting estimates• goodwill and intangibles• recoverability of receivables• loan impairments


• inventory obsolescence• accounting for income taxes• underlying systems of internal control.

Appendix 2 includes a checklist of risk factors that may affectcertain financial reporting areas in periods of uncertain ordifficult economic conditions. These factors may impact theauditor’s professional judgment as to whether the directors haveperformed an adequate going concern assessment and if theauditor agrees with the directors’ assessment.

The significance of identified events or conditions will varyfrom company to company

It is recognised that the existence of one or more relevant eventsor conditions (as listed previously) does not always signify that amaterial uncertainty exists that casts significant doubt on thecompany’s ability to continue as a going concern. However, in adifficult or uncertain economic climate their significance mayhave increased, requiring directors to consider or re-considerthem with more rigour and formality.

It should be noted that even if directors identified such eventsor conditions particularly those related to cash flow or solvencytheir significance might be mitigated by other factors.

12Examples

of these mitigating factors include:

• availability of unused lines of credit or similar borrowingcapacity

• capability of renewing or extending the due dates ofexisting loans

• capability of obtaining additional equity contributions• possibility of reducing overhead and administrative costs• possibility of using assets for factoring, sale and leaseback

or similar arrangements• ability to adopt alternative strategies that mitigate an

uncertainty.


12. See Appendix 2 of Compiled Auditing ASA 570

The following are examples where identified events or conditionscould be successfully mitigated by other factors:

• being unable to make debt repayments from operatingcash flows may be counterbalanced by management’splans to maintain adequate cash flows by alternativemeans, such as by disposal of assets, rescheduling loanrepayments, or obtaining additional capital

• when the impact of the loss of a key customer isalleviated by an increase in the company’s tradingtransactions with its other customers; or

• when the loss of a principal supplier is mitigated by theavailability of another suitable source of supply.

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When auditors assess the appropriateness of these mitigatingfactors in reducing the risks that will more likely result in goingconcern issues they look for evidence (for example,documentation) supporting:

• the effectiveness of strategies that directors believe willmitigate events or conditions that give rise to a materialuncertainty

• the ability of management to execute such strategies.

The relationship between going concern and liquidity riskdisclosures in the financial report

“Liquidity risk” is the risk that a company will encounterdifficulty in meeting its obligations associated with financialliabilities. It is therefore interrelated to going concern. Indifficult or uncertain economic conditions, a credit crunch (thatis, tightening of money supply) typically increases liquidity riskwhich consequently will make it a significant risk for manycompanies.

In terms of financial report disclosures directors will need to



pay particular attention to the adequacy of their liquidity riskdisclosures as well as ensuring there is appropriate supportingdocumentation to substantiate the disclosures. Auditors will needto consider management’s processes for preparing thesedisclosures, the disclosures themselves, and their consistency,relationship with and support for the going concern assumption.

Recent Australian Accounting Standard changes related toliquidity risk disclosures have been significant and include therequirements to disclose in the financial report:

• risks arising from financial instruments including liquidityrisk where it is material

• estimating future cash flows (in connection withestimating the recoverable amounts of assets)

• un-drawn borrowing facilities and any restrictions such ascovenant requirements where relevant

• defaults and covenant breaches and potentialreclassification of loans in default as current liabilities

• key sources of estimation uncertainty about the carryingamounts of assets and liabilities

• capital and other commitments not recognised in thefinancial report.

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In particular, Accounting Standard AASB 7 FinancialInstruments: Disclosures requires a company to make bothqualitative and quantitative disclosures in the financial reportconcerning liquidity risk where it is assessed as a materialfinancial risk by directors. Such disclosure requirements include:

• disclosure of information including sensitivity analysisthat enables users to evaluate the nature and extent ofthe company’s exposure to liquidity risk


14. Relevant accounting standards include AASB 7 Financial Instruments:Disclosures, AASB 136 Impairment of Assets, AASB 107 Cash FlowStatements, and AASB 101 Presentation of Financial Statements

• narrative disclosures explaining how liquidity risk arisesin the business and how it is managed in practice

• summary numerical data about liquidity risk based on theinformation that is provided to directors and other keymanagement personnel

• certain mandatory disclosures such as a maturity analysisof financial liabilities.

15

These financial report disclosures are supplemented by otherAustralian Accounting Standard requirements related toliquidity and going concern. For example:

• AASB 107 Cash Flow Statements requires disclosure ofun-drawn borrowing facilities where relevant to users’understanding of the financial position and liquidity ofthe company

• AASB 101 Presentation of Financial Statements requires: – disclosure of defaults and breaches of borrowing terms

and conditions in certain circumstances– disclosure of capital and other expenditure

commitments– disclosure of how the entity manages its capital

(objectives, policies and procedures).

The Australian Securities and Investments Commission (ASIC)reviews selected lodged financial reports for complaince with thereporting requirements of the Corporations Act 2001 includingaccounting standards. For example, during its review of 30 June2008 financial reports

16ASIC found that while most companies

made required AASB 7 disclosures many companies could have


15. AASB 7 was further amended in March 2009 with early adoption availablefor annual reporting periods beginning before 1 January 2009 (that is forexample, annual periods ending at 30 June 2009)

16. ASIC review of 30 June 2008 reports and areas of focus for upcomingreporting period, Media release 08–218, 3 December 2008http://www.asic.gov.au

provided better information to explain the risks associated withfinancial instruments and how they are managed. Somecompanies were assessed as having provided minimal disclosuresthat did not follow the principles and intent of AASB 7.

Further, a number of companies did not meet certain specificdisclosure requirements resulting in:

• lack of information about security provided onborrowings

• poor disclosure of debt maturity profiles• insufficient disclosure of risks associated with financial

instruments• poor disclosure of hedging arrangements.

Additional risk disclosures for listed companies

Principle 7 of the ASX Corporate Governance Principles andRecommendations (2nd edition) Recognise and Manage Risk

17states

that companies should establish a sound system of risk oversightand management and internal control. The principle says thatcompanies should establish policies for the oversight andmanagement of material business risks; that risk managementand internal control systems are established; and that thedirectors’ declaration (required by section 295A of theCorporations Act 2001) is founded on a sound system of riskmanagement and internal control. If the company has notfollowed the principle’s recommendations it is required todisclose why not (the “if not, why not” approach) in its annualreport within the Corporate Governance section.Supplementary guidance to assist with the interpretation ofPrinciple 7 was issued by the ASX Corporate Governance


17. ASX Corporate Governance Council, Corporate Governance Principles andRecommendations (2nd edition, August 2007). See especially Principle 7:Recognise and Manage Risk onhttp://www.asx.com.au/about/corporate_governance/revised_corporate_governance_principles_recommendations.htm

Council on 30 June 2008 to assist listed companies seeking todevelop an appropriate risk management system.

Further ASX Listing Rules related to listed companies arediscussed under Communication issues on page 47.


Insolvency and going concernKey points:

➣ Determining solvency is different to assessing goingconcern.

➣ The assessment of solvency is effectively a day-to-dayactivity. Directors assess a company’s ability to continue asa going concern when half-yearly and annual financialreports are approved for issuance.

➣ An unqualified audit opinion with an “emphasis of matter”paragraph related to going concern in an auditor’s reportdoes not mean a company is insolvent.

When is a company “insolvent”?

The Corporations Act 2001 defines “solvency” as being able topay all one’s debts, as and when they become due and payable. Adirector is assessed as having allowed a company to trade whileinsolvent when he or she has allowed the company to incur newdebts when there are not reasonable grounds to believe that itwill be able to pay its debts as they become due and payable.

It has been said that determining whether a company isinsolvent at a point in time is more art than science. Hence, it isessential that directors of a company facing significant financialuncertainty (for example, cash flow issues) seek independentprofessional advice including legal advice if they have anyconcerns about the company being a going concern or believe itcould become technically insolvent. This helps ensure that theycomply with their legal obligations as a director.

What are the consequences of insolvent trading?There are a number of potential consequences if a companybecomes insolvent:

• a voluntary administrator may be appointed by thedirectors or secured creditors

• the company may be wound up by the courts or


33

• in the event that there is a secured debt, a receiver maybe appointed over the assets of the company.

In terms of consequences for the directors of the company thathas been allowed to trade whilst insolvent the Corporations Act2001 provides for substantial civil and criminal penalties to beimposed as well as compensation proceedings to be broughtpersonally against a director. Any pecuniary penalties imposedon a director are not reimbursable under the terms of directorand officer insurance policies.

When, and over what period, is solvency determined?

Directors have an obligation to review and assess a company’ssolvency throughout the year, not just at year end/half yearlyreporting dates or when signing solvency resolutions. Solvencydeterminations are therefore a day-to-day matter formanagement and directors to manage. In connection with thequestion of insolvency generally and whether a company issolvent, directors may find the following comments fromPalmer J in Hall v. Poolman (2007) helpful:

There is sometimes no clear dividing line betweensolvency and insolvency from the perspective of thedirectors of a trading company which is in difficulties.There is a difference between temporary illiquidity and “anendemic shortage of working capital whereby liquidity canonly be restored by a successful outcome of businessventures in which the existing working capital has beendeployed.”...The first is an embarrassment, the second is adisaster. It is easy enough to tell the difference inhindsight, when the company has either weathered thestorm or foundered with all hands; sometimes it is not soeasy when the company is still contending with the waves.Lack of liquidity is not conclusive of insolvency, neither isavailability of assets conclusive of solvency....

Where a company has assets which, if realised, will pay


outstanding debts and will enable debts incurred duringthe period of realisation to be paid as they fall due, thecritical question for solvency is: how soon will theproceeds of realisation be available...As a very broadgeneral rule, a director would be justified in “expectingsolvency” if an asset could be realised to pay accrued andfuture creditors in full within about 90 days....

The position becomes murkier the less certain are theoutcomes e.g.: the market value of the asset may not beascertainable until the market is tested, so that it is notcertain that the realisation will pay in full both existingdebts and those to be accrued during the realisationperiod. The time at which the proceeds of realisationbecome available may depend upon the state of the marketand the complexity of the transaction.

There comes a point where the reasonable directormust inform himself or herself as fully as possible of allrelevant facts and then ask himself or herself and the otherdirectors: “How sure are we that this asset can be turnedinto cash to pay all our debts, present and to be incurred,within 3 months? Is that outcome certain, probable, morelikely than not, possible with a bit of luck, possible with alot of luck, remote, or is there is no real way of knowing?”

If the honest and reasonable answer is “certain” or“probable”, the director can have a reasonable expectationof solvency.

If the honest and reasonable answer is anywhere from“possible” to “no way of knowing”, the director can haveno reasonable expectation of solvency.

If the honest and reasonable answer is “more likelythan not”, the director runs the risk that a court will holdto the contrary in an insolvent trading claim.

If the honest and reasonable answer is “no way ofknowing yet, we need more information”, the director


must then ask: “How long before we have the informationso that we can give a final answer?”

If the honest and reasonable answer to that question is:“By a definite date which will not extend the realisationperiod (if there is to be one) beyond 3 months”, thedirector may reasonably say: “Let’s wait until then beforedeciding”.

If the honest and reasonable answer is “there is no wayof knowing yet when we will have the information tomake a decision”, the director must say: “Then there is noway that we can now have a reasonable expectation ofsolvency and there is no way we can reasonably justifycontinuing to trade without knowing when we will knowwhether the company is insolvent. Call theadministrators”. By this series of questions and answers Ido not mean to lay down some pro forma test of directors’liability for insolvent trading. Each case depends on itsparticular facts. These questions and answers merely serveto illustrate that when a company is struggling to pay itsdebts, the directors must face up to the issue of insolventtrading directly and with brutal honesty: they must notshirk from asking themselves the hard questions and fromacting resolutely in accordance with the honest answers tothose questions.18

Directors’ resolution of solvency

At least annually (and half-yearly in the case of listedcompanies) the Corporations Act 2001 requires directors ofcertain entities to make a resolution of solvency. Thisresolution states that in their opinion “there are reasonablegrounds to believe that the company will be able to pay itsdebts as and when they become due and payable”. Thedirectors’ declaration included in the financial report prepared


18. Hall v. Poolman (2007) 65 ACSR 123 [266]–[276]

under the Corporations Act 2001 must refer to this resolution.In making this resolution, directors must ensure that:

• the resolution is made at the date of the directors’statement, not as at the end of the financial reportingperiod (that is, balance sheet date). Consequently theimpact of transactions and conditions (that is, subsequentevents) that have arisen in the intervening period mustbe taken into account

• the period of assessment being considered for solvency isnot limited to only the period until the next directors’resolution although this period is the main focus. Ifevents or conditions exist further into the future, whichare now known to impact the company’s solvency, thenthese should also be taken into account.

Appendix 3 contains example going concern disclosuresillustrating how directors might explain their going concernassessment in the Directors’ Report taking account of difficult oruncertain economic conditions.

ASIC has also provided guidance on events or conditionsdirectors should take into account when formulating theirdeclaration of solvency. Among the matters which should beconsidered are:

• profit and cash flow budgets (the latter including, whereappropriate, any repayments of loans where no fixedrepayment dates have been stipulated);

• the ability to realise current assets particularly inventoriesand receivables;

• the ability to comply with normal terms of credit;• the possibility of removal of financial support by major

lenders;• the material effect of any contingent liabilities.

19


19. Refer ASIC Regulatory Guide 22: Directors’ Statement as to Solvency onhttp://www.asic.gov.au/

How does determining solvency differ from assessing goingconcern?

As discussed above a company is a going concern when it isconsidered to be able to pay its debts as and when they are dueand continue in operation for at least the next 12 monthswithout any intention or necessity to liquidate or otherwise windup its operations. In comparison a company is insolvent when itis unable to pay all its debts when they become due and payable.Unlike the day-to-day assessment of solvency directors are onlyrequired to assess a company’s ability to continue as a goingconcern each time the financial report is prepared and approvedfor issuance—annually for all companies under the CorporationsAct 2001 and in addition half-yearly for listed companies.

38 going concern issues in financial reporting

The company’s interaction with the auditor

Key points:

➣ The auditor has a responsibility to evaluate the directors’going concern assessment.

➣ Directors have a responsibility to document theirassessment including supporting assumptions.

➣ Directors should also seek to ensure that management hasappropriate processes in place to provide sufficientevidence needed by the auditor.

Auditor’s evaluation of directors’ going concern assessmentBelow is a discussion of the auditor’s responsibilities forevaluating the directors’ assessment of going concern throughoutthe audit process. Directors should find this discussion helpful inensuring that their assessment meets the auditor’s requirements.

Compiled Auditing Standard ASA 570 Going Concernrequires the auditor to consider:

• the appropriateness of the directors’ use of the goingconcern assumption in the preparation of the financialreport

• whether there are material uncertainties about thecompany’s ability to continue as a going concern thatneed to be disclosed in the financial report.

In evaluating the directors’ assessment the auditor will reviewand consider:

• the process the directors followed to make their assessment• the reasonableness of the assumptions on which the

assessment is based• the available documentation supporting the assessment• the use of external advisers (for example, legal counsel,

valuers, consultants)

39

• the directors’ plans for future action• whether the directors’ assessment is consistent with and

takes into account all relevant information the auditorhas become aware of.

20

Specific audit procedures the auditor may use21

include:

• analysing and discussing with management the company’scurrent and forecast cash-flow position, profit and loss,overall balance sheet position, and other relevant budgetforecasts

• comparing for reasonableness and consistency theforecast information to the audited financial report

• reviewing management’s previous forecast to actualresults to gauge management’s accuracy in forecasting

• considering the reliability of the company’s informationsystems in being able to generate such information

• forming a conclusion on whether there is adequatesupport for the assumptions underlying the forecast

• reviewing the terms of any loan agreements to determinewhether any conditions have been breached or are likelyto be breached in the period being considered

• considering the company’s plans to deal with unfilledcustomer orders

• confirming whether arrangements with related and thirdparties for financial support exist and are enforceable andassessing such parties’ financial ability to provide funding

• reading minutes of the meetings of shareholders, boards,and relevant committees (for example, audit committeeor governance/risk committee) for any discussionsconcerning the company’s solvency, going concern, orfinancial difficulties

• reviewing events or conditions that have occurred


20. See Compiled Auditing Standard ASA 570, paragraph 2521. See Compiled Auditing Standards SAS 570, paragraph 33

subsequent to year end for any evidence of factors that mayaffect the company’s ability to continue as a going concern.

The auditor may decide that it is appropriate to request from thedirectors a written representation on specific matters relating totheir going concern assumptions and plans.

22Such a

representation would typically include the directors’confirmation that they have provided the auditor with all of theavailable information/documentation regarding all significantevents and conditions taken into account in the directors’assessment of going concern.

Auditor’s consideration of directors’ strategies that mitigateevents or conditions giving rise to a material uncertaintyIf the auditor in assessing the directors’ strategies for mitigatingidentified events or conditions that may lead to a materialuncertainty has found that such strategies:

• are realistic• have a reasonable expectation of resolving identified

problems• are likely to be effectively put into place by the directors• if appropriate, are adequately disclosed in the notes to

the financial statements,

then the auditor exercises professional judgment and decideswhat impact, if any, these strategies have on the auditor’sevaluation of the adequacy of the going concern assessment.

Evaluating the adequacy of disclosures about goingconcernDisclosures in the financial reportAn essential quality of the information and disclosures providedin the financial report is that they are readily understandable by



users.23

Directors are responsible for ensuring that managementprepares a financial report that gives a true and fair view of thecompany’s financial position, cash flows and its results fromoperations. The auditor in reviewing the financial report(incorporating the complete set of financial statements)considers whether all the disclosures present a true and fair viewof the company. The understandability of the disclosures is animportant factor in determining whether the financial reportgives a true and fair view.

24

When the directors have included disclosures (ordinarily inNote 1 to the Financial Statements) documenting materialuncertainties while asserting the going concern assumptioncontinues to be the basis of preparation of the financial reportthe auditor needs to carefully review and consider the adequacyof these disclosures. In particular disclosures relating to:

• the principal conditions which caused the auditor toquestion the going concern assumption including asappropriate, the directors’ evaluation of their significanceand possible effects

• the directors’ plans and other mitigating factors includingas appropriate relevant prospective financialinformation

25

need to be evaluated by the auditor as part of determining theadequacy of the disclosures and potentially their type of auditopinion.

Disclosures in the Directors’ ReportIn addition to the disclosures in the financial report directorsare also responsible for preparing the Directors’ Report which is


23. AASB 101 Presentation of Financial Statements states that “the objective offinancial statements is to provide information about the financial position,financial performance and cash flows of an entity that is useful to a widerange of users in making economic decisions”.

24. See AASB 101, paragraph 15 and the Corporations Act 2001, section 29725. See Compiled Auditing Standard ASA 570, paragraph 36.

incorporated in the company’s annual report. The Directors’Report ordinarily presents the principal activities of thecompany; results and review of operations; significant changes inthe state of affairs; business strategies, developments andexpected results which may include the directors’ assessment ofthe company’s ability to continue as a going concern. Theauditor is required by Australian Auditing Standards to read theDirectors’ Report to determine whether there is anyinconsistency between such a report and the audited financialreport. If the auditor identifies any inconsistency the auditor isrequired to evaluate the need to amend any information in theaudited financial report.

26

Appendix 3 includes examples of directors’ disclosuresregarding going concern related issues in the Directors’ Report.

Implications for the auditor’s reportTypes of audit opinionsThe conclusion the auditor draws about the directors’ goingconcern assessment and liquidity risk disclosures (as disclosed inthe financial report) will determine the consequences for thetype of opinion expressed in the auditor’s report. The auditormay issue one of five possible audit opinions. In order of impacton the company, ranging from favourable to unfavourable theauditor may:

• issue an unqualified opinion• issue an unqualified opinion, but include an emphasis of

matter paragraph• issue a qualified opinion• issue an adverse opinion or • issue a disclaimer of opinion.

An unqualified audit opinion is one where the going concernbasis is determined by the auditor to be appropriate.


26. See Auditing Standard ASA 720 Other Information in DocumentsContaining Audited Financial Reports

The impact of going concern related issues on the auditor’sopinion is discussed below. It is important to understand thedifference between an “unqualified opinion with an emphasis ofmatter paragraph”, a “qualified opinion”, and an “adverse opinion”,as there are common misunderstandings of what they mean:

• Unqualified opinion, with an emphasis of matter paragraph: Ifthe auditor concludes that a material uncertainty existsthat leads to significant doubt about the ability of thecompany to continue as a going concern and theuncertainty has been adequately disclosed in the financialreport the auditor is required to express an unqualifiedopinion, but add an “emphasis of matter” paragraph forthe purpose of drawing attention to such disclosures.

27

While an emphasis of matter paragraph modifies theaudit report, it does not qualify the opinion.

• Qualified and adverse opinion: If the auditor concludes thatthe financial report disclosures regarding a materialuncertainty that leads to significant doubt about thecompany’s going concern status are not adequate theauditor is required to express either a qualified opinion oran adverse opinion as appropriate and to provide theirreasons for doing so.

28

The distinctions between a “qualified opinion” and an “adverseopinion” are as follows:

• The auditor expresses a qualified opinion when in theauditor’s professional judgment the effects of inadequatedisclosures on the financial report of uncertainties thatlead to a significant doubt about the company’s ability tocontinue as a going concern are not so material andpervasive to the financial report as to require an adverseopinion or a disclaimer of opinion.


27. See Compiled Auditing Standard ASA 570, paragraphs 37 and 3928. See Compiled Auditing Standard ASA 570, paragraph 41

• The auditor expresses an adverse opinion when in theauditor’s professional judgment:

– the effects of inadequate disclosures on the financialreport (as discussed above) are so material andpervasive that a qualified opinion is not sufficient todisclose the incomplete or misleading nature of thefinancial report resulting from such inadequatedisclosures or

– the company cannot continue as a going concerndespite the financial report having been prepared onthat basis.

The auditor expresses a disclaimer of opinion when in the auditor’sprofessional judgment:

• there is a limitation on the scope of the audit (forexample, the directors refuse to make or extend theirgoing concern assessment) and the effect of suchlimitation is so material and pervasive to the financialreport that the auditor has been unable to obtainsufficient appropriate audit evidence to complete theaudit and subsequently to express an audit opinion on thefinancial report.

29

A table and diagram showing the various types of opinions thatan auditor might draw from the directors’ assessment of goingconcern are included at appendices 4 and 5.

Reporting to ASICAuditors are required by s.311 of the Corporations Act 2001 toreport to ASIC when they have reasonable grounds to suspectcircumstances that amount to a significant contravention of theCorporations Act 2001. Such reporting is required to be made assoon as practicable or within 28 days of the auditor becoming


29. See Compiled Auditing Standard ASA 701 Modifications to the Auditor’sReport, paragraphs 21–25, for a discussion of matters that affect theauditor’s opinion

aware of the circumstances. This would include if the auditor hasreasonable grounds to believe that the directors have made afalse statement of solvency or are allowing a company to tradewhile insolvent.

It is important to note that the auditor is required to report toASIC based on “reasonable grounds to suspect” only—proof isnot required. There are further ASIC reporting requirements forauditors under ss.601HG and 990K of the Corporations Act 2001,related to managed investment schemes and financial serviceslicensees and businesses respectively. Refer ASIC RegulatoryGuide 34: Auditors’ Obligations: Reporting to ASIC for furtherinformation.


Communication issues

Key points:

➣ Listed companies have continuous disclosure obligationsunder the Corporations Act 2001 and ASX Listing Rules.

➣ ASX may suspend a listed company where it forms theview that the company is not a going concern.

➣ Transparent and timely communications of going concernrelated issues are critical.

ASX Listing Rules applicable to listed companies re goingconcernThe following ASX Listing Rules relate to a listed company’sdisclosure obligations around going concern or solvency. Wherecontraventions of the rules have occurred it also includes adiscussion of the ASX’s power to suspend their securities fromquotation.

Listing Rule 3.1—continuous disclosure

Continuous disclosure is the timely advising of information tokeep the market informed of events and developments as theyoccur.

ASX Listing Rule 3.1 requires that once a company is orbecomes aware of any information concerning it which areasonable person would expect to have a material effect on theprice or value of the company’s securities, the company mustimmediately tell ASX that information. The appointment of areceiver, manager, liquidator or administrator in respect of anyloan, trade credit, trade debt, borrowing or securities held by it orany of its child entities, if material under this rule, would requireimmediate disclosure.

Listed companies have obligations under ASX Listing Rule3.1 in relation to any expected material variations in their

47

financial results. In this regard, the ASX issued a CompaniesUpdate in January 2009: Profit Warnings and other Announcementsof Expected Material Differences in Financial Results.

30Following

are some key points from the ASX Companies Update.Companies are required to make an appropriate ASX

announcement immediately after they become aware that thereis expected to be a material difference in the financial results forthat period from the results that were recorded in the previouscorresponding period or from forecasts for that period that havebeen provided to the market by the company or (in some cases)from analysts’ consensus forecasts.

The disclosure must be made immediately after the companybecomes “aware” of any information concerning it that areasonable person would expect to have a material effect on theprice or value of the company’s securities. (Listing Rule 3.1)

“Aware” is defined in Chapter 19 of the Listing Rules:

• An entity becomes aware of information if a director orexecutive officer (in the case of a trust, a director orexecutive officer of the responsible entity) has, or oughtreasonably to have, come into possession of theinformation in the course of the performance of theirduties as a director or executive officer of that entity.

However, it should be noted that Listing Rule 3.1 includesexceptions where the information is confidential, that is where areasonable person would not expect the information to bedisclosed and where the information is generated for internalmanagement purposes of the company or comprises a matter ofsupposition or is insufficiently definite to warrant disclosure.

Guidance Note 8 to the Listing Rules (Listing Rule 3.1) wasissued to assist listed companies to comply with their continuous


30. A copy of this ASX Companies Update is found athttp://www.asx.com.au/resources/newsletters/companies_update/archive/CompaniesUpdate_20090122_0109_HTML.htm

disclosure obligations and outlines ASX’s expectations inrelation to best disclosure practice. Relevant provisions ofGuidance Note 8 include:

• Once a director or executive officer becomes aware ofinformation, they must immediately consider whetherthat information should be given to ASX. For example, acompany cannot delay giving information to ASXpending formal sign-off or adoption by the board.(paragraph 18)

• A material change in the company’s previously releasedfinancial forecast or expectation must be disclosed. Avariation in excess of 10% to 15% is generally consideredto be material, and should be announced by the companyas soon as the company becomes aware of the variation.If the company has not made a forecast, a similarvariation from the previous corresponding period willneed to be disclosed. In certain circumstances, a smallervariation will be disclosable. (paragraph 93)

• In making a disclosure, the company must provide somedetails of the extent of the variation. For example astatement by a company may indicate that, based oninternal management accounts, its expected net profit orEBIT (earnings before interest and tax) will be anapproximate amount (e.g. approximately $6m) oralternatively within a stated range (e.g. between $5m and$7m). Alternatively, the company may indicate anapproximate percentage movement (e.g. “up [or down] by25%”). The ASX discourages companies from usingimprecise terms such as “single digit” and “double digit”when disclosing financial forecasts or profit variations, asthey are potentially misleading to investors (paragraph 94)

• In some cases, it may be appropriate for a listed companyto disclose material variations from analysts’ consensusforecasts and expectations. (paragraph 95)


The January 2009 Companies Update also highlighted thatwhere a listed company reports results that have varied bygreater than 10 per cent to 15 per cent, the ASX will undertakea review of previous announcements made by that companyduring and after the financial reporting period to determine ifcontinuous disclosure obligations have been met.

The ASX also reviews companies whose financial reportdiscloses variations of approximately that size from:

• the results in the previous corresponding reporting periodor

• from forecasts or earnings guidance previously released bythe company itself or

• in appropriate cases, from analysts’ consensus forecasts.

Where it does not appear from that review that anannouncement indicating the likelihood of a material variationin the results had been made prior to the release of the periodicfinancial report ASX can write to the company asking it to statewhen it first became aware that there would be such a variation.If ASX decides to write to the company in order to confirm thatthe company has met its continuous disclosure obligations it isimportant to note that copies of correspondence between ASXand the company may be released to the market.

Listing Rule 12.2 On-going requirements—Financialcondition

Listing Rule 12.2 states that a company’s financial condition(including operating results) must in ASX’s opinion be adequateto warrant the continued quotation of its securities and itscontinued listing. It is a continuing obligation that preserves thequality of listing. It seeks to ensure that a listed company hassufficient financial strength to justify its listing with the ASX.ASX’s view is that if the company is not a going concern itsfinancial condition is inadequate to warrant quotation.

50


Listing Rules 17.1, 17.2, and 17.3 Trading halts, Suspensionof securities from quotationThese listing rules deal with trading halts and suspendingquotation of a company’s securities. ASX will suspend trading insecurities of a company if in ASX’s opinion it is not a goingconcern. ASX may also suspend trading in securities of acompany that has an Independent Audit Report or ReviewReport that contains an, “adverse” opinion or “disclaimer” ofopinion in respect of its going concern status.

Corporations Act 2001Directors should be aware that section 674 of the CorporationsAct 2001 provides the mechanism for the enforcement of thecontinuous disclosure obligations under the ASX Listing Rules:

• A person “involved in a contravention” by a listedcompany of its continuous disclosure obligations will bein breach of section 674(2A) of the Act and will beliable to pay a civil penalty of up to $200,000. Such aperson may also be liable under section 1325 of the Actto compensate shareholders who suffer loss as a result ofthe breach.

Directors may have a defence under section 674(2B) to anallegation of breach if they prove that they took all reasonablesteps in the circumstances to ensure that the company compliedwith its obligations under the Act.

Focus on the particular circumstances of the companyIn a difficult or uncertain economic environment full andtransparent communications by all companies is critical. Theguiding principle in communications to the market is: “Tell thegood news fast and the bad news faster”.

Companies should clearly articulate any uncertainties aroundthe going concern assumption together with how they propose todeal with them. When the company has issued a financial reportwith an auditor’s report containing an unqualified opinion with


an emphasis of matter paragraph the company should makestakeholders (for example, investment community, shareholders,and lenders) aware that the emphasis of matter paragraph doesnot necessarily imply the company is not a going concern or isnearing insolvency.

An example situation where a question regarding a company’sgoing concern status could arise when a lender is reluctant toconfirm that its current facility will be available after expirationof the facility. However, there may be a number of reasons why alender may be reluctant to confirm such a matter and it wouldnot mean that the company is not a going concern at the datethe financial report is finalised. This situation can arise when:

• In difficult or uncertain economic conditions banks orother lenders as a matter of policy refuse to provide suchconfirmations to their customers or their auditors.

• The company and its lenders are engaged in negotiationsabout the terms of a facility (for example, the interestrate) and there is no evidence that the lender is reluctantto lend to the company.

• The lender renewed a rolling facility immediately prior tothe date of the issuance of the annual report andfinancial report and is reluctant to go through theadministrative burden to confirm that the facility will berenewed on expiry.

Where the company has disclosed the circumstances giving riseto the uncertainties in the notes to the financial statementswhile still concluding that the going concern basis is appropriateand the auditor agrees with the disclosure the auditor typicallyexpresses an unqualified opinion with an emphasis of matterparagraph. The purpose of the paragraph is to draw attention tothe directors’ disclosure in the notes to the financial statementsof material uncertainties related to going concern.

If the company is facing significant uncertainties about itsfunding sources (for example, a withdrawal of key borrowing



facilities) which call into question the company’s ability tocontinue as a going concern then the directors will need tocarefully consider what strategies are available to them whichcould mitigate such uncertainties. These strategies should thenbe discussed with the auditors (as described previously). This willenable the auditors to evaluate these strategies and consider theirimpact on the auditor’s opinion. The directors will also need toexplain to the market their strategies for dealing with theseuncertainties.

Some example Directors’ Report disclosures are set out inAppendix 3 which are illustrative only. In practice suchdisclosures must be tailored to the specific individualcircumstances of each company.

APPENDICES

Appendix 1—checklist of possible events and conditions thatmay affect the assessment of going concernExamples of possible events and conditions that may be relevantto the assessment of going concern include:

Obtaining external finance:

• Company has experienced difficulties in the past inobtaining external finance facilities and/or in complyingwith the related terms and covenants.

• Borrowing agreements or executory contracts includeclauses relating to debt covenants at call terms orsubjective clauses (for example, a “material adversechange clause” or share price declines below a certaindollar value) that trigger full or partial repayment of theamount borrowed.

• Company has breached some of the terms or covenants ofthe borrowing agreements giving rise to the risk that thefacilities may be withdrawn or not renewed.

• Finance facility is secured on assets (for example,properties) that have decreased in value below theamount of the facility.

• Finance facilities are due for renewal in the next year.• Management have no plans for alternative arrangements

should current facilities not be extended.• Company is dependent upon funding from a related or

third party that is experiencing financial difficulties.• Financing is provided by a syndicate of banks and other

financial institutions and there are concerns about theviability of one or more of the members of the syndicate.

55

Management plans to overcome financing difficulties includedisposal of assets or possible rights issues:

• Plans developed prior to the onset of challenging oruncertain economic conditions have not been updated.

• Lack of evidence that management can realise the assetsto be disposed of at the expected values.

• Shareholders’ support uncertain in relation to a plannedrights issue.

• Possible “lukewarm” reception of prospective investors toshare issuance due to the company’s poor financialperformance.

Company provides significant loans or guarantees to relatedparties or third parties:

• Guarantees that may be called in.• Borrowers who/which may be unable to make payments.

Company dependent upon guarantees or financial supportprovided by a third party:

• Guarantor no longer able/prepared to provide theguarantee.

• Financial support withdrawn or in doubt.

Future cash flows:

• Reduction in cash flows resulting from unfavourableeconomic conditions.

• Major customers taking longer or unable to pay.• Market for product or services has contracted

significantly.• Terms or covenants of renewed financing are changed

and become more difficult to comply with (for example,increased interest rates or charges).

• Company is subject to margin calls as a result of adecrease in fair market value of financial instruments thatit holds.


• Company has issued loans (or received borrowings)having an introductory period during which favourableterms are in force which revert to normal market rates inthe forthcoming year.

Company heavily dependent upon particular counterparties:

• Suppliers facing financial difficulties provide essentialgoods/services.

• Company unable to find alternative suppliers.• Major suppliers tightening their credit terms.• Key customers experiencing financial difficulties.• Substantial reduction of orders from key customers.• Financial instrument counterparties are in default or

experiencing difficulty to comply with terms due to cashflow problems.


Appendix 2—checklist of risk factors arising from uncertainor difficult economic conditionsBelow are some events or conditions that may increase the risk ofmaterial misstatement (hence they are called risk factors) in acompany’s financial report during difficult or uncertain economicconditions. These factors may impact the auditor’s professionaljudgment as to whether the directors have performed an adequateassessment of going concern issues and whether the auditor agreeswith the directors’ assessment. As such, directors are encouraged tosatisfy themselves that management has provided the necessaryinformation or have the necessary processes in place to obtain theinformation to support their going concern assessment.

Fair values:

• Company needs to change valuation model and/ormanagement’s assumptions to reflect prevailingeconomic/market conditions.

• Active market no longer exists requiring use of a modelfor valuation purposes.

• Inputs to a model are not based on observable marketinputs, but rather are based on the company’s own data.

• Impairment of non-financial assets held at fair value (forexample, properties).

• Company uses an external valuation expert for fair valuemeasurements that needs to change its valuation modeland/or assumptions to reflect prevailing marketconditions.

• Company does not have the necessary in-house expertiseto undertake valuations.

Recent amendments to Australian Accounting Standard AASB139 Financial Instruments: Recognition and Measurement permitthe reclassification of certain financial assets, out of a “fair value”category in the balance sheet in particular circumstances. Thismay consequently impact debt covenant calculations.


Impairments:

• Impairments of assets other than those held at fair value(for example, need for increased doubtful debt provisionsbecause previously reliable customers may not be able topay their debts when due).

• Stock obsolescence resulting from significant decreases indemand for certain types of product.

• Impairment of the carrying amount of purchasedgoodwill.

• Increasing discount rates used in impairment calculationsbecause capital has become more expensive.

• Effect on impairment calculations of subsequent eventsin particular those relating to counterparties.

• Difficult credit market conditions may lead to thetriggering of acceleration clauses which may lead to theimpairment of financial assets.

Current versus non-current classification:

• Difficult market conditions may bring into question theclassification of assets and liabilities as current or non-current. (For example, the re-classification of liabilities asa result of a breach of loan covenants).

Revenue recognition:

• Difficult credit market conditions may make it harder todemonstrate that the revenue recognition criteria havebeen met.

Defined benefit superannuation plans:

• While not common in Australia those companies withdefined benefit superannuation plans may see their netobligations increased by reduction in value of assets heldin a related defined benefits pension scheme.


• Effect of large exposures to the share market, illiquidinvestments, and decreases in expected rates of return oninvestments.

• Increased need to consult an actuary to make valuationor funding judgments.

Hedging:

• Hedging arrangements no longer effective when aderivative counterparty is experiencing financial difficultyor more generally due to widening credit spreads on thederivative counterparty.

• In difficult market conditions hedge effectiveness mayhave failed either because it is no longer probable that aderivative counterparty will meet its obligations orbecause counterparty credit spreads, have increasedsubstantially, or because of the effect of changes in inter-bank lending rates on fair value interest rate hedges.

• Fair value of hedging instruments has decreased due tochallenging or uncertain economic conditions andresulting losses will impact the company’s profitability.

Insurance:

• The ability of an insurance company providing creditinsurance to meet claims.

Deferred income taxes:

• If a company is reporting losses or is expected to incurfuture losses, there may be a need to reduce the carryingamount of deferred tax assets to the extent that it is nolonger probable that the assets’ benefit will be utilised.


Appendix 3—examples of directors’ going concern andsolvency disclosures in the Directors’ ReportExamples of going concern disclosures

The following examples are illustrative only. In practice suchdisclosures in the Directors’ Report should be tailored to thespecific individual circumstances of each company. It should benoted that these disclosures will need to be reviewed by theauditor as they form part of the annual report. The auditor isrequired by Australian Auditing Standards to review suchinformation for consistency with the financial report. Whereinconsistencies are identified the auditor will raise these withdirectors in order to resolve them.

Example 1—a group with significant positive bank balances,uncomplicated circumstances and little or no exposure to economicuncertainties which may impact the going concern assumption.

The group’s business activities together with the factors likely toaffect its future development, performance and position are setout in the Business Review on pages X to Y. The financialposition of the group, its cash flows, liquidity position andborrowing facilities are described in the Chief Financial Officer’sReview on pages P to Q. In addition note A to the financialstatements includes the group’s objectives, policies and processesfor managing its capital; its financial risk management objectives;details of its financial instruments and hedging activities; and itsexposures to credit risk and liquidity risk.

The group has considerable financial resources together withlong-term contracts with a number of customers and suppliersacross different geographic areas and industries. As aconsequence the directors believe that the group is well placedto manage its business risks successfully despite the currentuncertain economic outlook.


After making enquiries the directors have a reasonableexpectation that the company and the group have adequateresources to continue in operational existence for the foreseeablefuture. Accordingly they continue to adopt the going concernbasis in preparing the financial report.

Example 2—a group with uncomplicated circumstances, someexposure to economic uncertainties and either a current material bankoverdraft or loan and a need to renew this facility in the foreseeablefuture albeit not imminently.

Paragraph similar to Example 1, paragraph 1.As highlighted in note B to the financial statements, the

group meets its day-to-day working capital requirements throughan overdraft facility which is due for renewal on [date]. Thecurrent economic conditions create uncertainty particularly over(a) the level of demand for the group’s products; (b) theexchange rate between the dollar and currency X and thus theconsequence for the cost of the group’s raw materials; and (c) theavailability of bank finance in the foreseeable future.

The group’s forecasts and projections taking account ofreasonably possible changes in trading performance show thatthe group should be able to operate within the level of itscurrent facility. The group will open renewal negotiations withthe bank in due course and has at this stage not sought anywritten commitment that the facility will be renewed. However,the group has held discussions with its bankers about its futureborrowing needs and no matters have been drawn to itsattention to suggest that renewal may not be forthcoming onacceptable terms.

Paragraph as per Example 1, paragraph 3.


Example 3—a group with complicated circumstances, considerableexposure to economic uncertainties and either a current material bankoverdraft or loan which requires renewal and perhaps an increase inthe year ahead.

Paragraph as Example 1, paragraph 1.As described in the Directors’ Report on page X the current

economic environment is challenging and the group has reportedan operating loss for the year. The directors consider that theoutlook presents significant challenges in terms of sales volumeand pricing as well as input costs. While the directors haveinstituted measures to preserve cash and secure additionalfinance these circumstances create material uncertainties overfuture trading results and cash flows.

As explained on page X the directors are seeking to sell aproperty to provide additional working capital. The group is innegotiations with a potential purchaser, but there can be nocertainty that a sale will proceed. Based on negotiationsconducted to date the directors have a reasonable expectationthat it will proceed successfully, but if not the group will need tosecure additional finance facilities.

As explained in the Business Review on Page Y the group hascommenced discussions with its bankers about an additionalfacility that may prove to be necessary should the sale of theproperty not proceed or should material adverse changes in salesvolumes or margins occur. It is likely that these discussions willnot be completed for some time. The directors are also pursuingalternative sources of funding in case an additional facility is notforthcoming, but have not yet secured a commitment.

The directors have concluded that the combination of thesecircumstances represent a material uncertainty that castssignificant doubt about the group’s and the company’s ability tocontinue as a going concern. Nevertheless after making enquiries


and considering the uncertainties described above the directorshave a reasonable expectation that the group and the companyhave adequate resources to continue in operational existence forthe foreseeable future. For these reasons they continue to adoptthe going concern basis in preparing the financial report.


Appendix 4—types of auditor’s opinionsThe table below shows the five types of audit opinions that theauditor might reach regarding the directors’ going concernassessment as disclosed in the financial report. The table showsthem in order of impact on the company ranging from favourable(green) to unfavourable (red).

Auditors Circumstances Impact foropinion

31financialreport/degree ofcaution for thecompany

Auditor agrees with the directors’ assessment andconsiders disclosures adequate

Unqualified Preparing the financial report on the goingopinion concern basis is appropriate, the going concern green

and liquidity disclosures are adequate and thereare no material uncertainties that cast significantdoubt on the company’s ability to continue as agoing concern

Unqualified Preparing the financial report on the goingopinion but concern basis is appropriate, but there are material orangewith an uncertainties that cast significant doubt on theemphasis of company’s ability to continue as a going concern.matter Such material uncertainties are adequatelyparagraph disclosed in the financial report.

Auditor agrees with the directors’ assessment butconsiders disclosures inadequate

Qualified Preparing the financial report on the goingopinion concern basis is appropriate but there are material orange/red

uncertainties that cast significant doubt on thecompany’s ability to continue as a going concern.

Such material uncertainties are not adequatelydisclosed in the financial report, but the effects ofsuch inadequate disclosures are not so materialand pervasive to the financial report as to requirean adverse opinion or a disclaimer of opinion.


31. See Compiled Auditing Standard ASA 570, paragraphs 35–49


Auditors Circumstances Impact foropinion

31financialreport/degree ofcaution for thecompany

Adverse Preparing the financial report on the goingopinion concern basis is appropriate, but there are material(inadequate uncertainties that cast significant doubt on the reddisclosure) company’s ability to continue as a going concern.

Such material uncertainties are not adequatelydisclosed.

The effects on the financial report of suchinadequate disclosures are so material andpervasive that a qualified opinion is not sufficientto disclose the incomplete or misleading nature ofthe financial report which results from theinadequate disclosures.

Auditor disagrees with the directors’ assessment ofgoing concern basis being appropriate

Adverse The financial report has been prepared on theopinion going concern basis, but the auditor has concluded red(going that using the going concern basis is inappropriate.concern basisinappropriate)

The directors refuse to undertake, or extend theassessment period of theirgoing concern assessment

Disclaimer When the directors refuse either to undertake orof to extend the period of their assessment of goingopinion concern with the result that the auditor is unable red

to form an opinion on the financial report.

31. See Compiled Auditing Standard ASA 570, paragraphs 35–49

Appendix 5—linking the auditor’s going concernconsiderations with types of audit opinions

32


32. See Compiled Auditing Standard ASA 570 Going Concern paragraphs35–49 (inclusive) and Compiled Auditing Standard ASA 701 Modificationsto the Auditor’s Report for further information

Does the initial riskassessment indicatethat the probability

of going concernproblems arising is

low?

Do the resultsof other

audit proceduressupport the initialrisk assessment?

Issue anunmodified audit

report(unqualified

opinion)

Is the auditor ableto obtain sufficientappropriate audit

evidence?

Express aqualifiedopinion

(inadequatedisclosure)

Have mitigatingcircumstances

beenadequatelydisclosed?

Do modifiedaudit procedures

indicate areasonable

expectation theentity will

continue as agoing concern?

Express anunqualified

opinion. Add anemphasis of

matter paragraph

Express aqualifiedopinion

(inadequatedisclosure)

Express anadverse opinion(inadequatedisclosure)

Express an adverse opinion(going concern basis

inappropriate)

Express a disclaimer of opinion

(Limitation of scope)

Is there adequatedisclosure of the

materialuncertainty?

Is the inadequatedisclosure’s impact

so material andpervasive to thefinancial report?

Is it highlyimprobable the

entity willcontinue as a

going concern?

No No

No

No

No

No

NoNo

Yes

Yes Yes

Yes

Yes

Yes

Yes

Yes

Appendix 6—summary of Australian laws/regulationson going concernThe following outlines the key sources of Australian laws,regulations and guidance around going concern. It is a guideonly, is not meant to be exhaustive and directors should refer tothe documents below for further information.

Directors’ obligations


ASX Listing Rules Description

ASX Listing Rules ASX listing rules have no specificrequirements to disclose informationabout whether a company is a goingconcern.

Listing Rule 3.1 However, under the continuousdisclosure requirements in Listing Rule3.1 changes in any significantuncertainties or mitigating factorsrelating to the company’s ability tocontinue as a going concern are likely torequire immediate disclosure.

Listing Rule 12.2 Listing Rule 12.2 (Financial Condition)states that a company’s financialcondition (including operating results)must in ASX’s opinion be adequate towarrant the continued quotation of itssecurities and its continued listing.ASX’s view is that if the company is nota going concern its financial condition isinadequate to warrant quotation.

Listing Rules 17.1, 17.2 and 17.3 Listing Rules 17.1, 17.2 and 17.3 deal withtrading halts and suspending quotation ofa company’s securities. ASX policy is tosuspend companies that haveIndependent Audit Reports that containadverse audit opinions or disclaimers ofopinion.


Corporations Act 2001 Description

s.295(4)(c) Directors must make a declaration in theannual financial report (s.303(4) for halfyear) whether in the directors’ opinionthere are reasonable grounds to believethat the company, registered scheme, ordisclosing entity will be able to pay itsdebts as and when they become dueand payable.

s.296(1) Financial reports must be prepared inaccordance with accounting standards.(see below)

Chapter 5 This chapter covers what happens andExternal administration and what is to be done when a company iscorporate insolvency insolvent or approaching insolvency

including the penalties that apply forbreaches of this chapter.

s.588G and subsections This section discusses the statutory dutyof directors to prevent insolvent tradingby the company. This includes solvencytest for payment of dividends.

ASIC Guidance Description

Regulatory Guide 22 This practice note discusses theDirectors’ statement as to insolvency obligations of directors in making the

statement on the solvency of thecompany and clarifies the status of thestatement required by s.295 (4) of theCorporations Act 2001.

Information Sheet 42 This information sheet provides generalInsolvency: A Guide for Directors guidance for directors of entities that are

insolvent or suffering from financialdifficulties and on the different forms ofexternal administration available.


Australian Accounting Standards Description

AASB 101 Under paragraphs 25–26 managementPresentation of Financial Statements must make an assessment of the(9/2007) company’s ability to continue as a going

concern and only prepare financialstatements on a going concern basis (inaccordance with Australian AccountingStandards) if it is a going concern.

If material uncertainty exists about thecompany’s ability to continue as a goingconcern then this must be disclosed inthe financial statements.

This assessment should cover a period ofat least, but not limited to, 12 monthsfrom the end of the reporting period (seealso Auditor’s obligations section page 71).

AASB 7 As well as the specific requirementsFinancial Statements: Disclosures relating to disclosures around the credit,(10/2008) liquidity and market risks associated with

financial instruments, AASB 7 requiresthat a company discloses informationthat enables users of its financial reportto evaluate the nature and extent of risksarising from financial instruments that itis exposed to at the reporting date.

Therefore, if financial instrumentsexpose the company to going concernissues or liquidity risks, AASB 7 wouldrequire that sufficient information bedisclosed such that users can make anassessment of that risk.

Auditor’s obligations


Corporations Act 2001 Description

s.311 Auditors are required to report to ASICwhen they have reasonable grounds (asopposed to proof) to suspectcircumstances that amount to asignificant contravention of theCorporations Act 2001 within 28 daysof the auditor becoming awareof the circumstances.

This would include if the auditorhas reasonable grounds to suspectthat the directors have made a falsestatement of solvency or are allowing acompany to trade while insolvent.

s.307 Auditors must comply with AustralianAuditing Standards (see page 72).

s.601HG This section discusses statutoryobligations of auditors of managedinvestment schemes, including reportingresponsibilities to ASIC for anysignificant contravention of theCorporations Act 2001.

s.990K Auditors of financial services licenseesare required to report to ASIC anysignificant contravention of theCorporations Act 2001 within 7 daysafter becoming aware of suchcontravention.


Australian Auditing Standards Description

Compiled Auditing Standard ASA 570 This Standard specifies an auditor’sGoing Concern responsibilities and the impact on the(6/2007) audit report if there are going concern

issues.An auditor needs to consider the

appropriateness of the going concernassumption over the period from the dateof the current audit report to theexpected date of the next audit reportfor the corresponding period in thesubsequent financial year.